SECTION 9. CONTACT

INFORMATION

The principal author of this Notice is Paul Epstein of the Office of the Associate Chief Counsel (International) within the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. For further information regarding this Notice contact Milton Cahn or Paul Epstein at 202-6223870 (not a toll-free call).

Grace Period Interest

Notice 97–67

Many credit card agreements provide for a grace period during which the credit card issuer does not charge interest for a billing cycle if the credit card holder pays off its account balance by a specified date. Under section 1004 of the Taxpayer Relief Act of 1997 (the “Act”), Pub. L. No. 105–34, 111 Stat. 788, 911, if a taxpayer holds a pool of credit card receivables, the taxpayer must accrue interest and original issue discount on the receivables based on a reasonable assumption regarding the timing of the payments by the obligors of the receivables in the pool. Thus, the taxpayer is not permitted to assume that all of its credit card holders will pay their balances by the date specified in the grace period provision of the credit card agreement and, based on this assumption, defer the inclusion of grace period interest. Section 1004 of the Act is effective for taxable years beginning after August 5, 1997. The Internal Revenue Service will issue guidance that provides the procedures for a taxpayer to automatically change its method of accounting to comply with section 1004 for the taxpayer’s first taxable year beginning after August 5, 1997.

The Service will process requests by taxpayers to change their methods of accounting for grace period interest that were pending with the Service on August 4, 1997. For any requests filed on or after August 5, 1997 (the date of enactment of the Act), the Service will exercise its discretion to deny requests to change to a method of accounting for grace period interest other than the method required by section 1004 of the Act. See § 446(e) of the Internal Revenue Code. See also H.R. Conf. Rep. No.

actually was withheld with respect to a $100 gross dividend paid to D, C may reduce by $5 ((15 percent

• 10 percent) x $100) the $20 withholding obligation on its substitute payment to B.

B makes a substitute payment of $70 to A. The rate of withholding tax that would be applicable to a U.S. source dividend payment made by a U.S. person directly to A is less than the rate of withholding tax that would be applicable to a U.S. source dividend payment made by a U.S. person directly to B. Accordingly, no U.S. withholding tax is imposed under § 1.871–7(b)(2) or § 1.881–2(b)(2) on the substitute payment received by A. However, A is not entitled to a refund or tax credit against any other U.S. tax liability for the additional 15-percent tax reflected in its substitute payment from B over the amount to which A would have been subject had A received a dividend directly from USCo.

Alternatively, USCo could have withheld 30 percent from the dividend payment made to D, thereby satisfying C’s withholding obligation under § 1.1441–7.